PHOENIX—With a bend toward independent hotels, Northwood Investors—and wholly owned management subsidiary Northwood Hospitality—is always on the lookout for unique deals and assets. At times it takes a long-term vision to realize the prize, but the New York City-based firm is in no hurry to cash in its hotel chips at the first opportunity.
The company’s ability to hold assets for up to 15 years provides it with ample time and space to find the right deals to maximize investor returns, said David McCaslin, president of Northwood Hospitality, during an interview at last month’s Lodging Conference.
“It’s a true opportunity fund where, depending upon what the situation is, we just want to make the best investment possible in the real state as opposed to (having) to have everything be exactly the same kind of style of investment,” McCaslin said. “Because we can hold longer, we’re not really looking necessarily to flip things or look for a ‘hot’ market; we’re really looking for stability over a period of time.”
Northwood Investors is a $3.6-billion multi-platform real estate investment fund that includes malls, offices, hotels and development land. President and CEO John Z. Kukral formerly headed real estate for Blackstone Group, and Jonathan S. Wang, the MD whose duties include overseeing hotel investments, is a Goldman Sachs alum.
The firm’s portfolio includes a number of hotels it owns and/or manages:
- The London West Hollywood in Los Angeles (200 rooms);
- Cheeca Lodge & Spa in Islamorada, Florida (214 rooms);
- The Revere Hotel in Boston (358 rooms);
- The New York Palace (899 rooms);
- Tranquility Bay in Marathon, Florida (87 rooms);
- The Naples Grande in Florida (474 rooms);
- The Marker in Key West, Florida (96 rooms, opens in mid-December); and
- The Four Seasons Prague (161 rooms).
With a portfolio dominated by independent hotels, it’s no wonder McCaslin often uses “unique” to describe Northwood’s mantra—especially when it comes to returns on investments.
“As far as the independent piece goes, part of our investment strategy, while we don’t have to do it, is that the amount of hotels that are not encumbered by either a long-term management contract or a long-term franchise agreement are relatively few,” McCaslin said. “From our standpoint, if we can present to the market—it’s like anything; rarity commands a premium. So there will always be a buyer for something just based on the cash flow of the asset.”
Northwood focuses more on the equity multiple of an asset than the internal rate of return, according to McCaslin. That tends to shine in deals that involve a fair amount of risk.
“Where we really came to independents was, almost every deal that we have done has some component that is relatively unique that has scared people,” McCaslin said. “We may go down into the low teens (IRR) for something that’s of particular interest or a longer (hold) item. Sometimes if it’s extremely risky, we may require that we have to have a 20. But I would say our average (IRR goal) is probably somewhere in the middle for what I would call as standard of a deal as we probably ever will do.”
While he didn’t provide financing details, McCaslin pointed to a deal in Boston that transformed a former Radisson hotel, a 900-car garage and two empty movie theatres into The Revere Hotel, as a deal with “some hair on it” that no one else wanted to touch.
“It plays into the investment strategy in the thought that before where things carried a certain amount of risk, people perceived large renovations as being riskier,” McCaslin said. “They are (riskier) because you have to know not only how much you’re paying for the asset but how do you value the capital that you’re doing because you have a risk that you could have overruns, and how do you value the returns you’re going to get off of that.”
Another independent story occurred in September when the company repositioned the former Waldorf Astoria in Naples, Florida, into the Naples Grande Beach Resort.
Looking for more deals
Northwood will continue to look for deals, particularly in major high-barrier-to-entry gateway and resort markets, he said.
“We are probably more of a top five to seven versus a top 25 player as well as resorts because we view anything that’s kind of waterfront or something of that nature as being its own kind of barrier to entry,” McCaslin said. “We tend to do things that are ‘nicer’ primarily because they’re a better store of value over time.”
The fund is poised to continue being active buyers into at least next year, the executive said.
“There is no allocation where we have ‘X’ amount of money that we have to put out the door by a certain time,” he said. “It’s really more about preservation of capital and a safe return for our investors. In the overall fund, the hotels are probably the highest IRR targets because most of the other things tend to be a little safe.”
McCaslin said Northwood’s biggest hotel opportunities will be capitalizing on situations other companies perceive as too risky and are running a little scared.
“They’re ultimately a very high-end quality piece of real estate or can be made into a high-end quality piece of real estate in an area that we believe over a 10- to 15-year period is going to be extremely stable or growing, and that’s why you kind of go to urban markets,” McCaslin said. “The price of entry into those is actually much higher, but because there’s a degree of patience, we can kind of execute against that where other people may not be able to.”
The biggest challenge for the company remains fending off the vast amount of equity chasing hotel deals, he said.
“Pricing is also going up because you’re in a period where the (Federal Reserve) has kept interest rates so low that people are starting to dabble in real estate as a yield play because the yield, even at 5(%), 6(%), 7%, is substantially better than a T-bill or something else,” McCaslin said. “The risk is that you start to get people going into the industry who really aren’t familiar with the industry. They’re just looking at it as an alternative investment for yield. Ultimately as you get amateurs into any industry, it ultimately becomes a negative when times change.”
One thing is certain: Northwood will take a calculated, well-planned approach, he said.
“I don’t think you’ll see us go out and buy 200, one-off hotels—growth just for the sake of growth,” McCaslin said.